|
|
|
Ottawa, 15 September 1989
|
|
Telecom Decision CRTC 89-12
|
|
BELL CANADA AND BRITISH COLUMBIA TELEPHONE COMPANY - PHASE III MATTERS AND RELATED ISSUES
|
|
I INTRODUCTION
|
In Bell Canada and British Columbia Telephone Company - Phase III Matters Including Updates to Phase III Manuals and Final Disposition of Applications from Association of Competitive Telecommunications Suppliers and CNCP Telecommunications, CRTC Telecom Public Notice 1988-49, 14 December 1988 (Public Notice 1988-49), the Commission initiated a proceeding to consider various issues that had arisen in connection with certain Phase III matters as well as to give final disposition to applications filed by the Association of Competitive Telecommunications Suppliers (ACTS) and CNCP Telecommunications (CNCP). ACTS, Bell Canada (Bell), British Columbia Telephone Company (B.C. Tel) and CNCP were made parties to the proceeding.
|
On 30 September 1988, Bell had submitted an update report to its Phase III Manual, as required in Bell Canada and British Columbia Telephone Company - Phase III Manuals: Compliance with CRTC Telecom Public Notice 1986-54 and Telecom Order CRTC 86-516, Telecom Decision CRTC 88-7, 6 July 1988 (Decision 88-7). In Telecom Order CRTC 88-637, dated 14 December 1988 (Order 88-637), the Commission accepted Bell's proposed updates except for the proposed treatment of accumulated deferred income taxes. The Commission concluded that this proposed modification should be considered further in the proceeding announced in Public Notice 1988-49.
|
|
On 31 October 1988, B.C. Tel submitted its update report to its Phase III Manual. In Telecom Order CRTC 88-638, dated 14 December 1988 (Order 88-638), the Commission accepted B.C. Tel's proposed modifications except for (1) the proposed treatment of headquarters building capital investment and associated expenses and (2) the proposed modification to accommodate the lack of Official Telephone Service (OTS) revenues associated with internal use assets. The Commission concluded that a consideration of these updates should be included in the proceeding initiated in Public Notice 1988-49.
|
|
On 30 December 1988, B.C. Tel submitted additional proposed updates to its Phase III Manual. In Telecom Order CRTC 89-55, dated 27 January 1989, the Commission accepted B.C. Tel's additional proposed modifications except for the proposed update to the Maintenance Expense study. The Commission concluded that a consideration of this proposed update should also be included in the proceeding initiated by Public Notice 1988-49.
|
|
In Decision 88-7, the Commission also directed Bell and B.C. Tel to submit a revised OTS methodology for the Commission's approval. Bell's proposed OTS methodology was filed on 30 September 1988. B.C. Tel's methodology was filed on 31 October 1988. In Orders 88-637 and 88-638, the Commission concluded that these proposed OTS methodologies should be considered further in the proceeding announced in Public Notice 1988-49.
|
The Commission issued Association of Competitive Telecommunications Suppliers and CNCP Telecommunications v. Bell Canada and British Columbia Telephone Company, Telecom Decision CRTC 88-9, 14 July 1988 (Decision 88-9), in response to applications from CNCP and ACTS dated 23 March 1988 and 7 April 1988, respectively. Based in part on 1986 Phase III results, ACTS and CNCP submitted in their applications that there were revenue shortfalls in Bell's and B.C. Tel's Competitive Network (CN) and Competitive Terminal - Multiline and Data [CT(MD)] categories. ACTS and CNCP requested various forms of interim and final relief with respect to those alleged shortfalls.
|
|
In Decision 88-9, the Commission determined that a prima facie case existed for interim relief with respect to B.C. Tel's CT(MD) category. Accordingly, the Commission directed the company to reduce its toll rates by the amount of the estimated CT(MD) shortfall for the period 1 July 1988 to 31 December 1988. The Commission stated that it would consider the dollar amount associated with these toll rate reductions to be a regulatory adjustment and would deem the amount to be revenues for the year 1988.
|
|
In Decision 88-9, the Commission concluded that further investigation of Bell's and B.C. Tel's CN and CT(MD) categories was required before it could deal with ACTS' and CNCP's applications for final relief. Bell and B.C. Tel were therefore directed to file 1988 and 1989 projected Phase III results reflecting the Commission's determinations in Decision 88-7. The Commission stated that it would determine what further procedure, if any, would be appropriate for the disposition of ACTS' and CNCP's applications for final relief once these results were submitted.
|
Pursuant to Decision 88-7, Bell filed its 1987 Phase III results on 30 September 1988. On the basis of those results, ACTS wrote to the Commission on 6 October 1988 requesting interim relief with respect to a shortfall in Bell's CT(MD) category. In addition, ACTS asked the Commission to initiate a proceeding to determine final rates for Bell's CT(MD) category and to consider any remedial action that might be required based on Bell's projected 1988 Phase III results. In Telecom Letter Decision CRTC 88-12, 7 December 1988, the Commission denied ACTS' request for interim relief.
|
|
In Public Notice 1988-49, the Commission stated that it intended to determine what action, if any, was required based on Bell's and B.C. Tel's projected 1989 Phase III results to be filed 15 December 1988, and on other factors relevant to the approval of rates for Bell's and B.C. Tel's services. The Commission also stated that it expected to dispose of ACTS' and CNCP's applications.
|
|
Finally, in Telecom Letter Decision CRTC 88-8, 31 August 1988, and in Telecom Letter Decision CRTC 88-10, 27 September 1988, the Commission stated that, should the submission of Phase III forward test year results become a periodic requirement, filing arrangements would have to be considered.
|
|
In Public Notice 1988-49, the Commission invited comment on whether the filing of forecast Phase III results should be required on a periodic basis and, if so, when. The Commission also considered in this proceeding the issue of the use of forecast Phase III results.
|
|
Pursuant to the procedure established in Public Notice 1988-49, ACTS, CNCP and the following interveners filed comments: Canadian Business Telecommunications Alliance (CBTA); Director of Investigation and Research, Competition Act, Consumer and Corporate Affairs (the Director); and the Government of Ontario (Ontario). Bell and B.C. Tel filed reply comments. ACTS and CNCP filed final comments on the issues related to the final disposition of their applications. The procedure also included an interrogatory process.
|
|
II PHASE III UPDATES
|
|
A. Bell: Accumulated Deferred Income Taxes
|
|
In its 30 September 1988 update report, Bell proposed a modification related to the treatment of accumulated deferred income taxes. The company stated that accumulated deferred income taxes are currently assigned to Phase III broad service categories (BSCs) on the basis of net plant investment assignment ratios. The company proposed to assign that portion of accumulated deferred income taxes that can be causally attributed to rate stability contracts (RSCs) directly to the CT(MD) category. The remaining accumulated deferred income taxes would be assigned to the BSCs on the basis of the net plant investment assignment ratios.
|
|
Bell explained that RSCs are treated as sales-type leases for financial statement and regulatory purposes, and as operating leases for income tax purposes. The company stated that a portion of its accumulated deferred income taxes is caused by timing differences between the recognition for accounting purposes and the recognition for income tax purposes of income related to RSCs. Since revenues, costs and investment associated with RSCs are assigned to the CT(MD) category, the company considered it appropriate to assign directly to the CT(MD) category that portion of accumulated deferred income taxes that is related to RSCs.
|
|
Both ACTS and CNCP submitted that Bell's proposed update should be denied. CNCP submitted that Bell had proposed this update in an attempt to cover up shortfalls in the CT(MD) category, rather than as a meaningful refinement to the Phase III methodology. ACTS submitted that the modification was proposed to shift results in a manner most favourable to the specific BSC. ACTS and CNCP also noted that B.C. Tel had not proposed any changes to the assignment of deferred taxes. ACTS submitted that, unless there is a situation unique to the carrier, Bell's and B.C. Tel's Phase III Manual revisions should be consistent.
|
|
CBTA submitted that the proposed update was consistent with previous Commission rulings regarding the Phase III methodology.
|
|
In its reply, Bell stated that it had proposed this modification for the very reason that the revenue surplus/shortfall would be incorrect without it. The company submitted that RSCs are a significant part of the CT(MD) category and that the tariffs for these contracts are developed on the basis of cost support data that recognize causally related accumulated deferred income taxes. Therefore, the company considered its proposed modification appropriate and submitted that it should be accepted. Neither Bell nor B.C. Tel responded to ACTS' or CNCP's comments with respect to B.C. Tel's different treatment of accumulated deferred income taxes.
|
Decision 1 of Inquiry into Telecommunications Carriers' Costing and Accounting Procedures: Phase III - Costing of Existing Services, Telecom Decision CRTC 85-10, 25 June 1985 (Decision 85-10), states that the Phase III methodology is to be limited to an identification of service costs in an empirical sense based on the principal of cost causation. The Commission considers Bell's proposed modification to be in accordance with this directive. Therefore, the Commission approves this update.
|
The Commission notes that B.C. Tel's response, made in confidence, to interrogatory B.C.Tel(CRTC)30Jan89-213 indicates that the revenues associated with RSCs are not a significant part of the company's CT(MD) category. In addition, unlike Bell, B.C. Tel treats RSCs as operating leases for financial statement and income tax purposes. However, in British Columbia Telephone Company - Accounting Treatment of Tier "A" Payments Received Under Multi-Plan Leasing Contracts, Telecom Decision CRTC 81-7, 6 May 1981, the Commission directed B.C. Tel to treat RSCs as sales-type leases for regulatory purposes. Furthermore, in the proceeding leading to British Columbia Telephone Company - Revenue Requirement for the Years 1988 and 1989 and Revised Criteria for Extended Area Service, Telecom Decision CRTC 88-21, 19 December 1988 (Decision 88-21), B.C. Tel indicated that the adjustment required for regulatory purposes is assigned directly to the CT(MD) category.
|
|
Based on the above, the Commission considers that B.C. Tel's regulatory adjustment for RSCs is acceptable in that it reflects the cost causation principle enunciated in Decision 85-10, as does Bell's proposed modification. Accordingly, no further action is required by the Commission at this time.
|
|
B. B.C. Tel: Headquarters Building Capital Investment
|
|
In its 31 October 1988 update submission, B.C. Tel proposed an update related to the treatment of headquarters building capital investment and associated expenses. B.C. Tel stated that rental charges paid by the Business Telecom Equipment Division (BTE) to the Telephone Operations Division for use of the headquarters building are included in the CT(MD) category expenses. However, the company's existing methodology also assigns portions of investment in buildings to the CT(MD) category using ratios that contain a BTE component. In order to avoid this double counting, the company proposed to exclude the BTE component from the ratios used to assign this investment.
|
|
ACTS objected to the use of unique methodologies for specific BSCs and submitted that B.C. Tel's proposal should be denied. ACTS stated that a general methodology for assigning these expenses should be employed. On the other hand, CBTA submitted that the proposed update was consistent with previous Commission rulings regarding the Phase III methodology.
|
|
In its reply, B.C. Tel reiterated the rationale for the update. However, B.C. Tel stated that, as an alternative, rental charges paid by BTE could be excluded from the CT(MD) category. The company submitted that either method would effectively eliminate the double counting imposed on the CT(MD) category by the current Phase III methodology.
|
|
The Commission agrees with B.C. Tel that its current Phase III assignment methodology overstates the BTE-occupied building space expenses associated with the CT(MD) category. However, the Commission prefers the company's alternative proposal to exclude the rental charges paid by BTE from the CT(MD) category, since it involves the use of a general methodology for the assignment of all headquarters building capital investment.
|
|
The Commission directs B.C. Tel to file, with its next update submission, a proposal to exclude the rental charges paid by BTE from the CT(MD) category and to utilize a general methodology with respect to all headquarters building capital investment. However, for the purposes of the 1988 Phase III results to be submitted by B.C. Tel on 30 September 1989, the Commission directs the company to exclude the BTE component from the ratios used to assign headquarters building capital investment. The Commission also accepts this approach for the purposes of the 1989 projected Phase III results under consideration in this proceeding.
|
|
C. B.C. Tel: Internal Use Assets
|
|
In its 31 October 1988 update submission, B.C. Tel proposed a modification that would change the methodology used to determine the amount of OTS provided, in order to accommodate the lack of OTS revenues associated with internal use assets.
|
|
The company stated that internal use assets consist of terminal equipment that is used by the company in the conduct of its business and that has no associated defined revenue stream. Terminal equipment that meets these two conditions is maintained in separate general accounts. The company stated that OTS, on the other hand, consists of tariff-based products and services that are used in the course of conducting company business and have an associated defined revenue stream.
|
|
In Decision 88-7, the Commission stated that the cost of OTS provided by each BSC should be based on the tariff value of the OTS provided, modified by the cost per dollar of revenue for that BSC. Since internal use assets have no defined revenue stream, the company proposed certain alternate procedures to estimate the costs of such equipment used in the provision of OTS. The company explained that these proposed procedures involved an identification of the investment in internal use assets, and associated expenses, currently assigned to the Access, CT(MD) and Competitive Terminal - Other [CT(O)] categories. In the company's view, these expenses represent the cost of OTS provided that is associated with internal use assets. B.C. Tel proposed to add these expenses to each category's respective OTS provided from tariff-based products and services.
|
|
However, the company also expressed concerns about the state of its records for internal use assets. B.C. Tel stated that all terminal equipment used in the company's business should be included in the internal use asset accounts. The company indicated that some terminal equipment used in the provision of OTS is not included in the internal use asset accounts and that this equipment does have a defined associated revenue stream. The company stated that a task force has been established to undertake a study of "Official Use Assets". The study, which will be conducted over 1989 and 1990, will ensure that the company's accounts for internal use assets include all OTS terminals. It will provide the basis for the company's preferred methodology for the treatment of OTS.
|
|
CBTA submitted that the proposed update was consistent with previous Commission rulings regarding the Phase III methodology. ACTS, however, submitted that there should be one methodology for all terminal equipment used in OTS and that it is not appropriate to approve a unique methodology for this particular class of OTS cost. ACTS argued that its position is reinforced by the fact that B.C. Tel's records on these costs are in a poor state. With respect to the OTS methodology in general, ACTS submitted that the company's use of assets to perform its business should be assigned to the BSC using the assets and that the cost should be the actual cost incurred. ACTS submitted that a full examination of the use of terminal equipment by the carriers in providing service is required.
|
|
In its reply, B.C. Tel agreed that assets used to perform company business should be assigned to the BSC using the assets and that the cost should be the actual cost incurred. The company stated that its proposed modification reflects this very principle. B.C. Tel also agreed that there should be one methodology for all terminal equipment used in OTS. The company stated that it had established its task force on Official Use Assets with just such an objective in mind. The company stated that, upon completion of the task force's mandate, the internal use assets modification under consideration in this proceeding would cease to be necessary, as all OTS (including that provided by internal use assets) will have a defined revenue stream and will be subject to the same uniform OTS methodology.
|
|
The Commission finds that internal use assets, which are exclusively terminal equipment, comprise a portion of OTS products and services used by company personnel in the provision of company business. In the Commission's view, the only differences between internal use assets and other assets used to provide OTS are that the former are directly identifiable from accounting records and do not have an associated defined revenue stream. This lack of a defined revenue stream means that the current methodology, set out in Decision 88-7 for costing OTS tariff-based products and services, cannot be applied to internal use assets.
|
|
In Decision 88-7, the Commission required that the method for estimating OTS costs be based on a tariff-based valuation of the OTS services and equipment included in each BSC, modified by the cost per dollar of revenue for that BSC, since the limitations of the Phase III costing process generally make a direct identification of OTS costs impractical. However, in this proceeding, B.C. Tel has presented evidence indicating that a significant portion of the investment associated with terminal equipment used in the provision of OTS can be directly identified. Consequently, the expenses associated with this investment may also be identified. Therefore, the Commission accepts the proposed update for the treatment of internal use assets.
|
|
The Commission notes the company's concern with respect to the state of its records on internal use assets and the company's establishment of a task force to study Official Use Assets. The Commission notes further that some terminal equipment used in the provision of OTS is not included in the internal use asset accounts and has a defined associated revenue stream. The Commission considers the OTS methodology prescribed in Decision 88-7 appropriate for these assets at this time. B.C. Tel indicated that its task force will ensure that all OTS terminal equipment is reflected in the internal use asset accounts. In the Commission's view, this will allow the direct identification of the investment and associated costs of all OTS terminal equipment and will eliminate the requirement to estimate costs for these assets based on tariff values modified by a cost per dollar of revenue factor.
|
|
Therefore, the Commission directs B.C. Tel to file progress reports on the findings of its task force. The first progress report should cover the period ending 31 December 1989 and should be filed with the Commission by 30 January 1990. Each progress report thereafter is to cover a six month period and be submitted 30 days after the completion of the period (i.e., July 30, January 30) until the task force has completed its work. At that time, the company is to file the task force's final report.
|
|
Finally, the Commission notes that this treatment of terminal equipment used in the provision of OTS has been necessitated by B.C. Tel's account structure and records. However, a similar separate identification of the investment and associated costs of terminal equipment used in the provision of Bell's OTS could enhance the Phase III process, if it could be achieved in a cost effective manner. Therefore, the Commission directs Bell to submit, by 14 December 1989, a report concerning the feasibility of developing a methodology or of modifying its account structure and records to identify separately the terminal equipment investment and associated costs used by Bell in the provision of OTS.
|
|
D. B.C. Tel: Maintenance Expense Study
|
|
In its 30 December 1988 update submission, B.C. Tel proposed to change the assignment of certain station connection expense accounts from the CT(MD) and CT(O) categories to the Access category. The company noted that, in Order and Guidelines for the Filing of Phase III Manuals by Bell Canada and British Columbia Telephone Company, Telecom Order CRTC 86-516, 28 August 1986 (Order 86-516), the Commission stated that the boundary between the Access and Competitive Terminal categories is the demarcation point on the customer's premises, with inside wiring costs on the customer side of the service demarcation point assigned to the CT(MD) category. The company stated that the station connection accounts that it proposes to reassign to the Access category reflect work done up to the demarcation point on the company side and, therefore, should be assigned directly to the Access category in accordance with Order 86-516.
|
|